LIBRARY OF CONGRESS
Copyright Office

Determination of Reasonable Rates and Terms for the Digital Performance of
Sound Recordings

AGENCY: Copyright Office, Library of Congress.

ACTION: Notice of proposed rulemaking

SUMMARY:

The Copyright Office is publishing for public comment proposed
rules that will govern SoundExchange, an unincorporated division of the
Recording Industry Association of America, Inc., when it functions as
the designated agent for the purpose of receiving royalty payments and
statements of accounts from nonexempt subscription digital transmission
services which make digital transmissions of sound recordings under a
statutory license.

DATES:

Comments are due no later than May 21, 2003.

ADDRESSES:

An original and five copies of any comment shall be delivered by hand to: Office
of the General Counsel, Copyright Office, James Madison Building, Room LM-403,
First and Independence Avenue, SE., Washington, DC; or mailed to: Copyright
Arbitration Royalty Panel (CARP), PO Box 70977, Southwest Station, Washington,
DC 20024-0977.

SUPPLEMENTARY INFORMATION:

Background

Section 106(6) of the Copyright Act,
title 17 of the United States Code, gives copyright owners of sound recordings
an exclusive right to perform their copyrighted work publicly by means of a
digital audio transmission. This right is limited by section
114(d), which allows certain noninteractive digital audio services to transmit
sound recordings under a compulsory license,

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provided that the services pay a reasonable royalty fee and comply with the
terms of the statutory license. Among the categories of services that may use
the section 114 license are preexisting subscription services \1\ of which there
are only three: Digital Cable Radio Associates, now known as Music Choice; DMX
Music, Inc. (“DMX”); and Muzak, L.P. (“Muzak”).

\1\ A “preexisting subscription service”' is defined as: A service
that performs sound recordings by means of noninteractive audio-only subscription
digital audio transmissions, which was in existence and was making such transmissions
to the public for a fee on or before July 31, 1998, and may include a number
of limited number of sample channels representative of the subscription service
that are made available on a nonsubscription basis in order to promote the subscription
service. 17 U.S.C. 114(j)(11).

Rates and terms for this license are established in one of two ways. Interested
parties may either negotiate rates and terms which, if approved through a notice
and public comment proceeding, become the final rules for the relevant license
period. Alternatively, if industry representatives cannot reach a voluntary
settlement, the Librarian of Congress convenes a three-person Copyright Arbitration
Royalty Panel (“CARP”') for the purpose of determining the applicable
rates and terms.

In 1995, the Librarian of Congress initiated the first rate adjustment proceeding
for the purpose of setting rates and terms of payment for use of sound recordings
by the preexisting services pursuant to the section 114 license. The three preexisting
subscription services and the Recording Industry Association of America (“RIAA”')
participated in this proceeding which concluded with the issuance of a final
rule and order by the Librarian of Congress. See 63
FR 25394 (May 8, 1998).

In that proceeding, the parties proposed, and the CARP adopted, a term which
gave the RIAA the responsibility for collecting and distributing the royalty
fees to all copyright owners. Id. at 25397. The Librarian adopted this term,
then crafted additional regulations that afforded copyright owners a means to
verify the accuracy of the royalty payments made by the RIAA collective,\2\
established the value of each performance, specified the nature of the costs
that RIAA may deduct from the royalty fees prior to distribution, and set forth
a procedure for handling royalty fees in the case where the collective is unable
to identify or locate a copyright owner who is entitled to receive royalties
collected under the statutory license.

\2\ In November 2000, RIAA formed “SoundExchange,” an unincorporated
division of RIAA, to administer statutory licenses, including its responsibilities
under the Librarian's May 8 Order. See, Revised RIAA Petition to Establish Terms
Governing SoundExchange at 1 n.1.

RIAA appealed both the rate set by the Librarian and the additional conditions
imposed on the RIAA collective in its capacity as the collection agent for copyright
owners. See, Recording Industry Ass'n v. Librarian of Congress, 176 F.3d 528
(D.C. Cir. 1999). The United States Court of Appeals for the District of Columbia
Circuit upheld the rate set by the Librarian and found that the Librarian has
the authority to impose terms on copyright owners or their agents. However,
it remanded for further consideration certain terms imposed on RIAA under 37
CFR 260.2(d), 260.3(d), 260.6(b), and 260.7, because the CARP had not considered
these issues, leaving the record devoid of any evidence upon which to fashion
any terms concerning the collection and distribution of the royalty fees. Id.
at 536.

On February 13, 2001, the Copyright Office initiated a new
proceeding to consider the terms remanded by the court with the
issuance of a scheduling order, directing the parties to this
proceeding to file their direct cases with the Office on April 17,
2001. See, Order in Docket No. 96-5 CARP DSTRA (February 13, 2001).
However, instead of filing a direct case on April 17, RIAA filed a
petition to establish terms governing the RIAA collective and to
suspend the scheduled proceeding. No party to the original proceeding
objected to the proposed terms. In fact, Music Choice had already
informed the Office by letter dated February 26, 2001, of its intent
not to participate further in this proceeding and that it did not
object to the terms to be proposed by RIAA.

Subsequently, RIAA revised these terms to remove a reference to the
section 112 statutory license for the making of ephemeral copies and to
make clear that membership in the collective is open only to those
copyright owners whose works are subject to statutory licensing and
thus generate the funds to be distributed by the collective. RIAA also
asked the Copyright Office to publish the revised terms pursuant to
Sec. 251.63(b). This provision allows the Librarian of Congress to
adopt proposed terms that are the result of settlement negotiations,
provided that no person with a substantial interest and an intent to
participate in a CARP proceeding files an objection. This procedure to
adopt negotiated rates and terms in the case where an agreement has
been reached has been specifically endorsed by Congress.

If an agreement as to rates and terms is reached and there is no controversy
as to these matters, it would make no sense to subject the interested parties
to the needless expense of an arbitration proceeding conducted under (section
114(f)(2) (1995)). Thus, it is the Committee's intention that in such a case,
as under the Copyright Office's current regulations concerning rate adjustment
proceedings, the Librarian of Congress should notify the public of the proposed
agreement in a notice-and-comment proceeding and, if no opposing comment is
received from a party with a substantial interest and an intent to participate
in an arbitration proceeding, the Librarian of Congress should adopt the rates
embodied in the agreement without convening an arbitration panel.

S. Rep. No. 104-128, at 29 (1995)(citations omitted).

Accordingly, the Copyright Office published the proposed terms in the Federal
Register and requested public comment. 66
FR 38226 (July 23, 2001). In response to this notice, the American Federation
of Musicians (“AFM”) and the American Federation of Television and
Radio Artists (“AFTRA”) filed a Notice of Intent to Participate
and objections to certain of the proposed terms. Shortly thereafter, RIAA began
discussions with AFTRA and AFM, regarding their objections, and the matter has
been held in abeyance.

Since that time, a significant event has occurred that bears directly on the
resolution of this proceeding. In December of 2002, Congress passed the Small
Webcaster Settlement Act of 2002 (“SWSA”), Public
Law 107-321, 116 Stat. 2780. Among other things, the SWSA amended 17 U.S.C.
114(g) in two important ways which address specific issues which are the subject
of this proceeding. First, the SWSA provides for direct payment to featured
recording artists and to the administrators of the escrow accounts provided
for in 17 U.S.C. 114(g)(2)(B)&(C). Second, the act allows a designated agent,
prior to the distribution of the royalty receipts, to deduct reasonable costs
incurred by that agent in the administration of those receipts, including, but
not limited to, costs associated with the collection and distribution of the
royalty fees and the costs incurred in the participation of negotiations or
arbitration proceedings under sections 112 and 114.

Because of these changes in the law, RIAA has again revised its
proposed amendments to 37 CFR 260 to conform the terms in dispute to
the new law and, in doing so, it has addressed the concerns of AFM and
AFTRA. Consequently, AFM and AFTRA have withdrawn their objections to
the proposed terms and their Notice of Intent to Participate in a CARP

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proceeding. At this juncture, Sec. 251.63(b) requires the publication
of the proposed rules to provide those persons with a substantial
interest in the proceeding with an opportunity to comment on the rules.
Provided that no party who is entitled to participate in a CARP on
remand of this proceeding and who has a substantial interest in the
rules files an objection and a Notice of Intent to Participate in a
CARP proceeding to resolve an objection within the scope of this
proceeding, the proposed rules will be adopted as final regulations.

The proposed terms shall govern SoundExchange, the collecting rights entity
that was formed from the designated RIAA collective, in its capacity as the
sole agent designated to receive royalty payments from the three subscription
services that were parties to this proceeding. Terms governing the administrative
functions of any future collective or the designation of alternative agents
shall be decided in future rate adjustment proceedings either through negotiations
or after a hearing before a CARP based upon a fully developed written record.
See, e.g., 67 FR 45239 (July 8, 2002).
For this reason, parties must limit their comments to the terms offered in the
context of the proceeding to set rates and terms for the three subscription
services-- Music Choice, DMX, and Muzak--for the period October 28, 1998 (the
effective date of the Digital Millennium Copyright Act) through December 31,
2001, the remand order, and the law as amended by the SWSA.

Should a person object to the proposed terms, he or she must file a
written objection with the Copyright Office and an accompanying Notice
of Intent to Participate. Any proceeding convened to consider these
terms would be a continuation of the prior CARP proceeding, Docket No.
96-5 CARP DSTRA, on remand from the United States Court of Appeals for
the District of Columbia Circuit. See, 17 U.S.C. 802(g). Therefore, the
content of the written challenge must include a statement explaining
the basis of the person's substantial interest in that proceeding and
entitlement to participate in that proceeding, the proposed rule the
person finds objectionable, and the reasons for the challenge. If no
comments are received, the regulations shall become final upon
publication of a final rule.

List of Subjects in 37 CFR Part 260

Proposed Regulation

In consideration of the foregoing, the Copyright Office proposes amending
part 260 of 37 CFR as follows:

PART 260--USE OF SOUND RECORDINGS IN A DIGITAL PERFORMANCE

1. The authority citation for part 260 continues to read as follows:

Authority: 17 U.S.C. 114, 801(b)(1).

Sec. 260.2 [Amended]

2. In Sec. 260.2, remove paragraph (d).

3. Section 260.3 is amended by revising paragraphs (c), (d), and
(e) to read as follows:

Sec. 260.3 Terms for making payments of royalty fees.

* * * * *

(c) The agent designated to receive the royalty payments and the
statements of account shall have the responsibility of making further
distribution of these payments to those parties entitled to receive
such payments according to the provisions set forth at 17 U.S.C.
114(g)(2); Provided that the designated agent shall only be responsible
for making distributions to those parties who provide the designated
agent with such information as is necessary to identify and pay the
correct recipient for such payments. The agent shall distribute royalty
payments on a reasonable basis that values all performances by a
Licensee equally based upon the information provided by the Licensee
pursuant to the regulations governing records of use of performances by
Licensees; Provided, however, that parties who have designated the
agent may agree to allocate their shares of the royalty payments made
by any Licensee among themselves on an alternative basis. Parties
entitled to receive payments under 17 U.S.C. 114(g)(2) may agree with
the designated agent upon payment protocols to be used by the
designated agent that provide for alternative arrangements for the
payment of royalties consistent with the percentages in 17 U.S.C.
114(g)(2).

(d) The designated agent may deduct from the payments made by
Licensees under Sec. 260.2, prior to the distribution of such payments
to any person or entity entitled thereto, all incurred costs permitted
to be deducted under 17 U.S.C. 114(g)(3); Provided, however, that any
party entitled to receive royalty payments according to 17 U.S.C.
114(g)(2) may agree to permit the designated agent to deduct any
additional costs.

(e) Commencing June 1, 1998, and until such time as a new
designation is made, SoundExchange, which currently is an
unincorporated division of the Recording Industry Association of
America, Inc., shall be the agent that receives royalty payments and
statements of account under this part 260 and shall continue to be
designated as such if it should be separately incorporated.

4. Section 260.6 is revised to read as follows:

Sec. 260.6 Verification of royalty payments.

(a) General. This section prescribes general rules pertaining to
the method of verification of the payment of royalty fees by the designated
agent to interested parties; Provided, however, that the designated agent and
any interested person may agree as to an alternative method of verification.

(b) Frequency of verification. Interested parties may conduct a single
audit of the designated agent during any given calendar year and no calendar
year shall be subject to audit more than once.

(c) Notice of intent to audit. Interested parties must file with
the Copyright Office a notice of intent to audit the designated agent. Such
notice of intent shall also be served at the same time on the designated agent
to be audited. Within 30 days of the filing of the notice of intent, the Copyright
Office shall publish in the Federal Register a notice announcing such filing.

(d) Retention of records. The interested party requesting the verification
procedure shall retain the report of the verification for a period of three
years.

(e) Acceptable verification procedure. An audit, including underlying
paperwork, which was performed in the ordinary course of business according
to generally accepted auditing standards by an independent auditor, shall serve
as an acceptable verification procedure for all interested parties.

(f) Costs of the verification procedure. The interested parties requesting
the verification procedure shall pay for the cost of the verification procedure,
unless an independent auditor concludes that there was an underpayment of five
(5) percent or more, in which case, the designated agent shall bear the costs
of the verification procedure.

(g) Interested parties. For purposes of this section, interested
parties are those individuals or entities who are entitled to receive royalty
payments pursuant to 17 U.S.C. 114(g)(2), or their designated agents.

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5. Section 260.7 is amended by removing the word “collecting”
after the phrase “If the designated”; by removing the word “collecting”
each place it appears and adding the word “designated” in its place;
and in the last sentence, by removing the word “fees” and adding
the word “payments” in its place.